Fitch Rates Qwest Corporation's Proposed Senior Unsecured Notes Offering
CHICAGO -- May 14, 2013
Fitch Ratings has assigned a 'BBB-' rating to Qwest Corporation's (QC)
proposed offering of senior unsecured notes due 2053. Proceeds are expected to
be used to partially repay $750 million of senior unsecured notes maturing on
June 15, 2013. QC is an indirect wholly owned subsidiary of CenturyLink, Inc.
(CenturyLink). QC's and CenturyLink's Issuer Default Rating (IDR) is 'BB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The following factors support QC's and CenturyLink's ratings:
--Fitch's ratings are based on the expectation that CenturyLink will
demonstrate steady improvement in its revenue profile over the next couple of
--Consolidated free cash flows (FCFs) are expected to strengthen with a
reduction in the dividend, and liquidity is expected to remain relatively
--CenturyLink's execution risks related to the integration of Qwest
Communications International, Inc. (Qwest) and Savvis, Inc. (Savvis) are
nearly behind the company;
--QC's issue ratings are based on the relatively lower leverage of QC and its
debt issues' senior position in the capital structure relative to CenturyLink.
The following concerns are embedded in QC's and CenturyLink's ratings:
--CenturyLink's recent change in financial policy, which incorporates the
maintenance of net leverage of up to 3.0x, less restrictive than its previous
--The decline of CenturyLink's traditional voice revenues, primarily in the
consumer sector, from wireless substitution and moderate levels of cable
telephony substitution. Although such revenues are declining in the revenue
mix and are being replaced by broadband and business services revenues, these
latter sources have lower margins.
Fitch expects CenturyLink's revenues to decline slightly in 2013, and reach
stability in 2014. Revenues from high-speed data and certain advanced business
services, including the managed hosting and cloud computing services offered
by Savvis and a modest but growing level of revenues from facilities-based
video, are expected to contribute to stability.
In February 2013, CenturyLink initiated a $2 billion common stock repurchase
program, accompanied by a dividend reduction. The company plans to repurchase
$2 billion in common stock by February 2015, primarily funded from FCF. Annual
FCF improves by approximately $450 million as a result of a reduction in the
common stock dividend of approximately 25%, but on a net basis, cash returned
to shareholders will increase.
On a gross debt basis, CenturyLink's leverage for the last 12 months ending
March 31, 2013 was approximately 2.7x, consistent with the 2.7x to 2.8x range
Fitch expects over the next several years. Debt reduction in 2013 and 2014 is
expected to be modest. Additionally, there will be some pressure on EBITDA as
there are lower incremental merger-related cost savings in 2013 than in 2012.
CenturyLink's total debt was $20.8 billion at March 31, 2013. Financial
flexibility is provided through a $2 billion revolving credit facility, which
matures in April 2017. As of March 31, 2013, approximately $1.925 billion was
available on the facility. CenturyLink also has a $160 million uncommitted
revolving letter of credit facility.
The principal financial covenants in the $2 billion revolving credit facility
limit CenturyLink's debt to EBITDA for the past four quarters to no more than
4.0x and EBITDA to interest plus preferred dividends (with the terms as
defined in the agreement) to no less than 1.5x. Qwest Corporation (QC) has a
maintenance covenant of 2.85x and an incurrence covenant of 2.35x. The
facility is guaranteed by Embarq, Qwest Communications International Inc. and
Qwest Services Corporation (QSC).
In 2013, Fitch expects CenturyLink's FCF (defined as cash flow from operations
less capital spending and dividends) to range from $1 billion to $1.3 billion.
Expected FCF levels reflect capital spending within the company's guidance
range of $2.8 billion to $3 billion. Within the capital budget, areas of focus
for investment primarily include continued spending on fiber-to-the-tower,
data center/hosting, broadband expansion and enhancement, as well as spending
on IPTV, the company's facilities based video program.
Fitch believes CenturyLink has the financial flexibility to manage upcoming
maturities due to its FCF and credit facilities. Long-term debt maturities
remaining in 2013 and 2014 are approximately $0.9 billion and $0.7 billion,
respectively. The remaining 2013 maturities reflect the repayment of a $176
million CenturyLink maturity on April 1, 2013 but are before the $750 million
June QC maturity to be partly repaid by the proceeds of this offering.
Going forward, Fitch expects CenturyLink and QC will be CenturyLink's only
issuing entities. CenturyLink has a universal shelf registration available for
the issuance of debt and equity securities.
Fitch does not expect a positive rating action over the next several years
based on its assessment of the competitive risks faced by CenturyLink and
expectations for leverage.
A negative rating action could occur if:
--Consolidated leverage through, but not limited to, operational performance,
acquisitions, or debt-funded stock repurchases, is expected to be 3.5x or
--For QC or Embarq, leverage trends toward 2.5x or higher (based on external
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecoms Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Rating Telecom Companies
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John Culver, CFA, +1 312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
David Peterson, +1 312-368-3177
Michael Weaver, +1 312-368-3156
Brian Bertsch, +1 212-908-0549
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